Wednesday's Commidities Roundup

Published 7:00 pm, Tuesday, March 11, 2003

Crude oil futures at the New York Mercantile Exchange settled at their highest level in 12 years Wednesday after the Department of Energy reported a mostly unexpected decline in inventories, heightening supply worries ahead of a possible war in Iraq.

Inventories declined by 3.8 million barrels to 269 million barrels last week, slumping below the critical 270-million-barrel mark, which the Department of Energy calls the "lower operational level" and at which spot shortages can occur.

The decline came as imports of crude oil fell by 1.058 million barrels a day to 7.621 million barrels a day.

Most market analysts, thinking imports would rise, had projected a slight build in crude stocks.

"Once we fall below 270 million barrels, we are very vulnerable to shortages," said Phil Flynn, an analyst at Alaron Trading Corp. in Chicago. "Whenever you stretch it this tight, things are bound to break down. With the prospect of war, it is a very scary situation."

Oil prices took off after the release of the data and never looked back. At the Nymex, April crude oil futures rallied $1.11 to settle at $37.83 a barrel, the highest settlement for a front-month contract since October 1990, two months after Iraq invaded Kuwait.

Petroleum products futures also closed higher, with gasoline futures surging on the back of a sharp decline in inventories. April gasoline futures closed up 1.52 cents at $1.1139 a gallon. April heating oil futures settled at $1.0352 a gallon, up 0.50 cent, despite an unexpected build in distillate stocks reported by the Energy Department.

At London's International Petroleum Exchange, April Brent rose 62 cents to close at $33.91 a barrel.

Natural gas for April delivery fell 7.9 cents to settle at $5.865 per 1,000 cubic feet.

The sharp rally came even as officials of the Organization of Petroleum Exporting Countries continued to assure the market about supply.

"There is no shortage of supply, the market is in balance, there is plenty of oil and there is a commitment (to) do our best within our capabilities, which we think are enough to satisfy any shortage in the market for whatever reason," Saudi Oil Minister Ali Naimi said.

Saudi Arabia is the world's largest oil producer and exporter.

On Tuesday, OPEC members, meeting in Vienna, agreed to leave output quotas unchanged but pledged to pump more oil in case of a disruption in Iraqi oil.

OPEC officials say the group has enough capacity to make up for the loss of Iraqi oil. Rilwanu Lukman, top Nigerian oil minister, estimated capacity at 2 million to 2.5 million barrels a day, roughly as much as Iraq now produces.

But analysts worry that OPEC may not have the capacity to offset the loss of Iraqi oil, let alone a large-scale supply disruption in the Persian Gulf.

The International Energy Agency, the Paris-based energy watchdog for the West, said Wednesday that OPEC's spare capacity will fall to below 1 million barrels a day in March, thanks to a sharp increase in the group's output in recent months.

The prospect of a supply disruption coupled with historically low U.S. inventories have helped lift oil prices to near their highest level since 1990.

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Speculation about a possible delay had caused prices to decline Monday and Tuesday. But prices recovered Wednesday, as the United States and Britain made progress in obtaining approval of a new resolution on Iraq.